Deficit Doves Meet the Deficit Owls

On July 19, The Daily Beast published a piece by Harold Evans, Joseph Stiglitz, Alan Blinder, Robert Reich and others, urging greater fiscal stimulus in the short-term and renewed fiscal discipline over the medium- and longer-term horizon. A number of bloggers on this site were asked to support their deficit-dove petition. We declined, and so did the three wise owls who wrote the following statement, which first appeared at New Deal 2.0.

The following is a reprint of a response by Paul Davidson, James K. Galbraith and Lord Robert Skidelsky (Deficit Owls) First published at New Deal 2.0

“We three were each asked to sign the letter organized by Sir Harold Evans and now co-signed by many of our friends, including Joseph Stiglitz, Robert Reich, Laura Tyson, Derek Shearer, Alan Blinder and Richard Parker. We support the central objective of the letter — a full employment policy now, based on sharply expanded public effort. Yet we each, separately, declined to sign it.

Our reservations centered on one sentence, namely, “We recognize the necessity of a program to cut the mid-and long-term federal deficit…” Since we do not agree with this statement, we could not sign the letter. Why do we disagree with this statement? The answer is that apart from the effects of unemployment itself the United States does not in fact face a serious deficit problem over the next generation, and for this reason there is no “necessity [for] a program to cut the mid-and long-term deficit.”

On the contrary: If unemployment can be cured, the deficits we presently face will necessarily shrink. This is the universal experience of rapid economic growth: tax revenues rise, public welfare spending falls, and the budget moves toward balance. There is indeed no other experience in modern peacetime American history, most recently in the late 1990s when the budget went into surplus as full employment was reached.

We agree that health care costs are an important issue. But health care is a burden faced by both the public and private sectors, and cost control is a job for health policy, not budget policy. Cutting the public element in health care – Medicare, especially – in response to the health care cost problem is just a way of invidiously targeting the elderly who are covered by that program. We oppose this.

The long-term deficit scare story plays into the hands of those who will argue, very soon, for cuts in Social Security as though these were necessary for economic reasons. In fact, Social Security is a highly successful program which (along with Medicare) maintains our entire elderly population out of poverty and helps to stabilize the macroeconomy. It is a transfer program and indefinitely sustainable as it is.

We call on fellow economists to reconsider their casual willingness to concede to an unfounded hysteria over supposed long-term deficits, and to concentrate instead on solving the vast problems we presently face. It would be tragic if the Evans letter and similar efforts – whose basic purpose we strongly support – led to acquiescence in Social Security and Medicare cuts that impoverish America’s elderly just a few years from now.”

James K. Galbraith is a Professor at The University of Texas at Austin and author of “The Predator State.”

Lord Robert Skidelsky is the author, most recently, of “Keynes: The Return of the Master.”Paul Davidson is the Editor of the Journal of Post Keynesian Economics and author of “The Keynes Solution.”

Tis a good, necessary program, but "Maintains our entire elderly population out of poverty" is a considerable exaggeration!If you include Federal geezer welfare (aka SSI) it maintains quite a few of us at a level of tolerable poverty. But even ten years ago, San Diego had nonprofits reporting having found old people living on the streets, unable to afford local rents– which were still short of San Francisco levels.Social Security is a little less stingy and inadequate than most of our other programs intended for poor people– probably because it includes people above the poverty line and able (so far) to defend their interests politically…Meanwhile, if we geezers need cavities filled, there are dentists nearby in Tijuana…

I was under the assumption that, what especially makes our present situation distinct from the New Deal era, is the growing reliance on foreign financing of the US deficit. Whereas domestic financing (generally by the wealthy) of gov't debt can be done without much worry (since, if govt wished to pay back the debt, it may have to raise taxes on everyone–including the wealthy–thus giving back only to take away again), foreign financing must be paid. And as that principal balance consumes a greater portion of the budget, it is clear that there is a limit to how long it can go on–both economically and politically.I understand your political objective–i.e. to not give even an ounce of ammunition to the conservatives who wish to destroy what little welfare state exists in the U.S. But I'm having difficulty wrapping my head around the economic argument. It is true that the U.S. enjoys fantastic lee-way in creating debt (unlike virtually any other country), but with a largely for-profit health care industry pushing up public costs, endless warfare expenditures, and a consumption based economy, it is difficult to believe that everything can go on as it does forever. Generating full employment–which would presumably have to mean generating new, productive, profitable export industries–would certainly help, and more focus should indeed be put on this. But I am not easily persuaded that the current means of financing US sovereign debt is perfectly sustainable.

The 1990's were fueled by a debt bubble that has been bursting for the past decade, plus some one time cuts. Government taking more resources out of the system, mainly to attempt to reflate what is already oppressive debt is nonsense. You won't solve a 10% GDP deficit by getting 5% of the people jobs, nor will you solve a collapsing debt that is nearly twice that of the 1930's with spending. Everything government spends is used to buy property and services out of the private sector and the money has to be borrowed, not used to improve production. Government should be concentrated on finding an economical means of the affected surviving this mess, liqidate the banks, which are all insolvent (won't be done because of the rotten political structure of the US, which has evolved since the establishment of the Federal Reserve) and liquidate bad debt in bankruptcy. There is nothing wrong with deflation, as price are going to have to be much lower for people to survive on what is left. What we are doing at the present is incurring more debt with China by broadly financing the purchase of goods from China through our credit policies.

Anonymous and mannfm11 , the wealthy, whether domestic or foreign, do not finance US government debt. The government spends and it taxes; these it must do. But selling bonds is just playing around with interest rates, and it could stop selling them tomorrow. Deflation will be very bad and depress growth and create massive unemployment and increase government debt. Our present situation is very similar to that of the Depression, and who holds debt is meaningless. The solution is the same as back then, a New Deal, whole hog deficit spending. This is what China, other Asian countries and Australia did recently, very successfully. This would not "take resources out of the system" but mobilize existing unused resources for the benefit of all, and would have the incidental effect of raising tax revenue and paying down the debt.